SAN FRANCISCO — It has been a very good week for the virtualization giant VMware, as it drew a record-breaking 22,000 people to the Moscone Center for its lavish spectacle of a conference.

VMworld was the place to see and be seen for the information technology elite. It was also a hot ticket for indie music fans, with Train and Imagine Dragons entertaining a packed audience of data analysts and IT admins.

The company succeeded in demonstrating that it still boasts serious marketing muscle, massive annual revenues, and an unrivaled network of influencers. It also sent a clear message to the hordes of enterprise startups biting at VMware’s heels: You may have grit, a decent product, and a few million dollars in venture funding, but you are not landing those multimillion-dollar contracts.

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At least, not yet.

But there are those who see through the hype, and believe there is far more to the story. Investors believe that VMware needs to innovate, and fast, if it can continue to withstand the competition.

To borrow from another classical myth, VMware has an Achilles’ heel: storage technology. Ocko has invested in a number of potential competitors who are focused on this challenging technology problem, including a few open source storage solutions.

In addition, Ocko believes that the largest companies are moving to the open-source cloud framework OpenStack, which poses a major threat to VMware. It has prompted smaller vendors like Piston Cloud to offer customers their services with OpenStack “right away” without a reliance on “any particular vendor,” meaning VMware. Mass cloud adoption is opening up the market to more competitors, and may potentially weaken VMware’s firm grip on virtualization — if not now, according to ReadWrite contributor Matt Asay, but somewhere down the line.

Ocko isn’t the only investor who is seizing on some of VMware’s weaknesses.

“Large and legacy players are really hurting because so many new startups are growing at their expense,” said Bipul Sinha, the resident storage expert at Lightspeed Venture Partners, who sits on the board of fast-growing storage startup Nutanix. Nutanix is a partner of VMware, so Sinha is careful to critique VMware, although it’s evident that he sees new opportunities for younger rivals.

As our own Matt Marshall put it, many of VMware’s recent products have been a defensive play, and not particularly innovative. Even in the midst of VMworld, the company’s stock plummeted about five percent.

VMware and the three-legged stool

The technology is complex, and it’s easy to get lost in all the marketing hype, so I like to use the analogy of the three-legged stool to describe the major components of a modern virtual data center.

The first leg is virtualization. VMware made its mark in the IT world by virtualizing computing resources, enabling enterprises to use server hardware much more efficiently by running many virtual machines in each physical server while creating and deploying these virtual machines when and as they were needed.

VMware is leaning hard on that leg of the stool, as it was an early pioneer of virtualization and remains the clear market leader.

But in addition to servers, the other major components of a data center are storage and networking — and accordingly, the other legs of the virtual data center stool are software-defined networking and software-defined storage. It’s here that VMware faces greater challenges.

“VMware has to innovate in these two vectors before it can offer customers a comprehensive infrastructure,” said Sinha.

VMware clearly understands that it’s under pressure, recently shelling out a massive $1.26 billion for networking vendor Nicira. With this purchase, VMware has the opportunity to take what it did to server virtualization and do that to network infrastructure.

“We’re not done until every app, every database, every big data application, and every physical server becomes replaced by virtual infrastructure,” VMware CEO Pat Gelsinger said on stage at VMworld. “That is our passion, and we will continue to drive compute virtualization until it is 100 percent virtualized for the data center.”

To guarantee that it has the cash reserves to fulfill its vision, VMware is shedding workers and products. It laid off about 7 percent of its staff this year or about 900 employees. In addition, VMware spun off a number of its noncore business units to focus on infrastructure, rather than applications.

EMC, VMware’s parent company, bundled together a number of these assets to form a new entity called Pivotal. Paul Maritz, VMware’s former chief executive, has been appointed to lead Pivotal and ensure it can deliver on its promise to bring customers next generation big data and cloud products.

The bloodiest battleground? Software-defined storage

At one of the dozen or so networking events during VMworld, I asked Accel investor Ping Li for his greatest takeaway from the conference. Without hesitation, Li responded, “storage.”

Storage may not be the sexiest space, but it is one of the hottest investment opportunities in Silicon Valley.

In the storage space, VMware will need to beat out a number of fast-growing upstarts. Among them, Nutanix, which cleared north of $80 million in revenues last year by delivering storage and compute all in one.

Nutanix CEO Dheeraj Pandey made an appearance at VMworld, like many of the hot storage startups. Pandey told me in a phone interview that VMware has plenty of work to do.

“A lot of VMware’s current business is still based on selling virtualization, but that is quickly getting commoditized,” Pandey said. For instance, Microsoft offers a rival product, Hyper-v. “So VMware has little choice but to push into storage,” he said.

Nutanix isn’t the only storage company that is growing like gangbusters. Pure Storage netted a $150 million investment this week and is a strong candidate for a public offering. Nimble Storage closed another $40 million round in December as it gears up to its own IPO.

VMware’s major dilemma, as it moves into this space, will be to build or buy. VMware certainly has the talent to build its solution in-house, and it has a few advantages, starting with a direct pipeline to enterprise. In other words, as Ocko points out, the company still has “channel control — and likely will for the foreseeable future.”

However, it’s possible that VMware will be too late to the storage party.

“As VMware pushes further into the network and storage layers, there is plenty of room left for startups to innovate,” said Dave Cahill, the director of strategic alliances at SolidFire, a company that delivers storage to cloud providers. “While long on promise, VMware’s software-defined vision is significantly diminished without an equally dynamic infrastructure underneath it.”

We’re keeping a close eye on stealthy startups like Blue Data and Qumolo, which promise to make enterprise data storage far more flexible and scalable than it is today. If they can deliver, these startups will out-innovate large and legacy vendors.

“Everybody is asking for a pure data box that can run anywhere and be completely virtualized,” said Ocko. “That’s the fantasy.”